- Private mortgage insurance is often referred to as PMI
- Private mortgage insurance is paid for by the borrowers to benefit the lender
- HUD, the parent of FHA, requires mandatory FHA Annual Mortgage Insurance Premium (FHA MIP) for the entire term of a 30-year fixed-rate FHA loan
- This holds true no matter how much equity the homeowner has on the home
- The only way to cancel the FHA mortgage insurance premium is to pay off the home mortgage loan balance by refinancing or selling the home and paying off the mortgage
- With conventional loans, borrowers who have at least 20% equity on a home are not required to have private mortgage insurance (PMI)
- However, any borrower with less than 20% equity and/or higher than 80% LTV are required to have private mortgage insurance
- Private mortgage insurance can be canceled on conventional loans when the homeowner loan to value hits 78% LTV
- The loan to value can get lowered by either paying down the mortgage loan balance or if the home appreciates in value
Understanding PMI And How It Works
What is private mortgage insurance?
- Why do certain borrowers have PMI while others do not?
- How do I benefit from private mortgage insurance?
- Is private mortgage insurance required?
- All of the above questions are frequently asked questions by homebuyers and homeowners considering refinancing their home mortgages
- PMI is paid by mortgage borrowers
- However, private mortgage insurance has absolutely no benefits to homeowners
- PMI is mandatory on conventional loans for borrowers who do not have a 20% down payment
- Any down payments less than 20% require PMI
- This is because lenders take on risk with borrowers with less than 20% down payment
- Private mortgage insurance companies will insure lenders up to 20% equity in the event if the homeowner default on their home mortgage and/or the property goes into foreclosure
Private mortgage insurance is a very small price to pay to make a low down payment home purchase for homebuyers.
How Much Does Private Mortgage Insurance Cost
FHA loans have two types of private mortgage insurance.
- A one time upfront FHA mortgage insurance premium and an annual FHA MIP of 0.85% for the term of a 30-year fixed-rate mortgage
- However, with conventional loans, there are no upfront PMI
- The annual private mortgage insurance varies on several factors
- However, a borrower’s credit score has the biggest impact on PMI
- Any borrower with less than 20% equity requires private mortgage insurance on conventional loans
Other factors that determine the premium on PMI are the following:
- Borrower’s credit scores
- Loan to value
- Borrowers debt to income ratio
- The type of property (condos, townhomes, single-family homes, multi-family homes)
Contact us at Gustan Cho Associates for rates on private mortgage insurance.
There are other loan programs that do not require mortgage insurance. We will discuss this topic in the next paragraph.
Mortgage Insurance Requirements On Other Home Loan Programs
There are other home mortgage programs that do not require mortgage insurance.
- VA and USDA loans do not require any down payment
- Homebuyers can purchase a home with a VA and/or USDA loan with 100% financing
- VA and USDA loans do not require any mortgage insurance
- However, these two loan programs have restrictions unlike FHA and Conventional loans
- You need to be an active and/or retired member of the U.S. Military with a certificate of eligibility to qualify for VA loans
To qualify for a USDA loan, the property needs to be in a designated rural area by the Department of Agriculture. There are maximum household income limits on USDA loans.
Refinancing FHA To Conventional Loans To Eliminate FHA MIP
Many homeowners with FHA loans should explore in refinancing their FHA to a conventional loan and eliminate their FHA annual mortgage insurance premium.
- The housing market has been booming for the past several years
- Both HUD and the Federal Housing Finance Agency (FHFA) have increased FHA and Conforming Loan Limits for the past four years due to rising home prices
If you have owned your home for the past several years, you will be surprised at how much it has appreciated.
Understanding PMI: Qualifying For A Mortgage With A Lender With No Overlays
If you have any questions about this article and/or other mortgage-related topics please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. Gustan Cho Associates is a five-star national mortgage company with no lender overlays and is licensed in multiple states.
August 18, 2020 - 3 min read